Switzer on Saturday

It’s a trade war but the Dow ended up!

Founder and Publisher of the Switzer Report
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The trade war has begun! Tariffs have been enacted, meaning that the 10% slugs on Chinese exports to the USA will now be pushed up to 25% but goods already on their way to the USA will be given an exemption. Despite this, the Dow Jones ended up 114 points. Why? Well, despite the failure of the talks to get to a satisfactory end point, as The Guardian reported: “US Secretary Mnuchin said the talks were constructive and trade negotiator Liu said that they went fairly well. The mixed signals from President Trump earlier had put pressure on energy prices and global stock markets, but positive comments from both sides sparked a rebound near close of trading for the week.” (Alfonso Esparza, analyst at trading firm OANDA)

But wait there’s more. China has been given three to four weeks to make an agreement or more tariffs will be coming. If Donald Trump was a typical politician, you’d bet or invest on the prospect that it will happen on this time frame. But he’s not. And he’s dealing with Chinese counterparts who culturally can’t deal with public embarrassment well and aren’t happy to be pushed around.

That said, some smart analysts like Jim Paulsen, chief investment strategist at The Leuthold Group are optimistic. “It’s really likely that it gets resolved and if it does, you’ve got to believe we’d be back at highs very quickly,” he said. “Because around it, there’s a good story – a lot of green shoots, rates are staying low and better earnings.”

And this is what the man himself tweeted from his @realDonaldTrump Twitter account: “Talks with China continue in a very congenial manner – there is absolutely no need to rush – as Tariffs are NOW being paid to the United States by China of 25% on 250 Billion Dollars worth of goods & products. These massive payments go directly to the Treasury of the U.S.”

He backed it up with this tweet: “Tariffs will make our Country MUCH STRONGER, not weaker. Just sit back and watch! In the meantime, China should not renegotiate deals with the U.S. at the last minute. This is not the Obama Administration, or the Administration of Sleepy Joe, who let China get away with ‘murder!”

(Sleepy Joe is former Vice President, Joe Biden, who was the Chair of the Senate Foreign Relations Committee under Obama and who’s preparing to try to take on Donald in next year’s election.)

The importance around seeing a solution to this trade war is underlined by the share price of big US exporters, such as Apple, whose share price is down over 7% for the week. And not long before the close, Wall Street was looking at the worst week for stocks in 2019.

All this turmoil hasn’t been good for Uber, which listed on Thursday. On Friday, it started the day under its $45 kick-off price and before the close was at $41.90, down 6.89%.

Locally, our stock market is caught between the trade war talks drama and the looming prospect of a Prime Minister Bill Shorten. I know there are plenty of Australians who are happy about the notion but after spending the past two weeks doing Switzer Investor Strategy Days in Sydney, Melbourne and Brisbane, where we encountered around 2000 investors, I know how worried they are about the proposed changes Labor is promising.

Despite that, the S&P/ASX 200 Index only dropped 24.9 points (or 0.4%) to 6310.9, which was a pretty fair effort. But anxiety over the trade negotiations is certain. “The extent of the sell off in the last few days is evidence that consensus market expectations can be wrong, especially when investors rely more on rumour than fact,” said J.P. Morgan Asset Management global market strategist, Hannah Anderson. (SMH)

One of the big market stories this week was Adelaide Brighton’s 17.9% tumble, with the company’s projected profit looking to be more than 15% lower as it reflects the turmoil in the residential construction sector.

The next PM has to look seriously at the blockages in lending following the Royal Commission and the APRA crackdown on property investors and Chinese borrowers.

And what are they drinking at Treasury Wine Estates? First, an analyst in a US investor conference tipped TWE’s share price could fall 50%! And then the CEO, Michael Clarke, sold a cool $7 million worth of shares. Even though it was explained as “for personal reasons”, it’s never a good look that the market cops.

Curious play of the week goes to the ACCC, which blocked the TPG Telecom merger with Vodafone Hutchison Australia but it was good for Telstra’s share price. I thought a stronger rival for Telstra would be good for competition but maybe I’m missing something.

And Charlie Aitken has to be happy with the Kidman Resources takeover offer from Wesfarmers, as a long-time supporter of the stock. Other lithium stocks saw their prices improve on the news.

For us this week (ahead of the election), we should get a great snapshot of the economy, with a huge data drop that could be good or bad for Scomo.

We see lending on Monday, the NAB business confidence reading on Tuesday, the Westpac consumer sentiment number on Wednesday, along with the latest wage rise statistics, unemployment on Thursday and Friday brings an RBA speech from Michele Bullock, the Assistant Governor.

What I liked

  • The Reserve Bank has trimmed near-term forecasts for economic growth and inflation, but held the medium-term forecasts. In a year’s time, economic growth is seen running at the 2.75% “speed limit”, with underlying inflation around 2%.
  • The RBA left interest rates unchanged, which I hope was more saying the economy doesn’t need it rather than it being an election-driven decision.
  • Retail trade rose by 0.3% in March after a 0.9% increase in February (previously estimated at +0.8%). And interestingly, prices across retailers rose by 0.8% in the December quarter – the biggest rise in 2½ years. Price increases over the past six months were the biggest for an equivalent period in a decade.
  • The trade surplus fell from an upwardly-revised record high of $5.14 billion in February (previously $4.8 billion) to $4.95 billion in March but it’s still a surplus. The annual trade surplus with China hit record highs, as did annual exports and imports with the country.
  • The IBD/TIPP economic optimism gauge in the US rose from 54.2 to 58.6 in May (forecast 54.5).
  • US chain store sales rose at a 5.9% annual rate in the past week, up from the 5.5% gain in the prior week.
  • China’s Caixin/Markit private sector services purchasing managers’ index rose by 0.1 point to a 16 month high of 54.5 points (survey: 54.2 points) in April. A level above 50 denotes an expansion in activity.

What I didn’t like

  • The RBA cut this financial year’s expected economic growth from 2.5% to 1.75% but in November it thought we’d be growing at 3.25%. This shows the impact of the housing sector dramas that have to be addressed by the next Federal Government and Bill needs to think about delaying his property changes.
  • The Australian Industry Group (AiG) Performance of Construction Index (PCI) fell by 3 points to 42.6 points in April, remaining near 5½-year lows. The employment sub-index fell by 6.9 to 39.2 points in April – the lowest level since May 2013. Readings below 50 indicate a contraction of activity.
  • The Melbourne Institute monthly headline inflation gauge rose by 0.2% in April. The gauge’s annual growth rate decelerated from 2.1% in March to 1.8% in April. The smoothed 12-month annual average of the gauge is at 1.9% – the slowest growth rate since June 2017.
  • ANZ job advertisements fell for the sixth straight month, down by 0.1% in April after falling by 1.7% in March. But note this: ads were only down by 5.6% over the year to 166,464 and that follows these numbers hitting record highs in 2018.
  • The European Commission trimmed growth forecasts and now expects euro-zone growth of 1.2% in 2019.

The funny side of Trump’s tweets

One tweet this week saw him tell us that he’d received a “beautiful letter” from the Chinese leader, which again raised hopes that a deal might be done. If our money and wealth didn’t rise and fall on this guy, you’d have to say he’s a scream!

The week in review:

Top Stocks – how they fared:

What moved the market?

  • US President Donald Trump announced that an increase in tariffs from 10% to 25% on US$200 billion worth of Chinese goods would come into effect while trade talks continued between the two nations in Washington on Thursday and Friday local time.
  • The Reserve Bank of Australia kept interest rates on hold at 1.5% for the 30th consecutive meeting. RBA governor Philip Lowe estimated growth would be “around 2.75%” in 2019, down from a forecast of 3% growth from three months ago and 3.5% from six months ago.

The Week Ahead:

Australia
Monday May 13 – Overseas arrivals/departures (March)
Monday May 13 – Lending (March)
Monday May 13 – Credit/Debit card lending (March)
Tuesday May 14 – ANZ-Roy Morgan consumer confidence
Tuesday May 14 – NAB business survey (April)
Wednesday May 15 – Consumer confidence (May)
Wednesday May 15 – Wage price index (March quarter)
Thursday May 16 – Employment/unemployment (April)
Thursday May 16 – Speech by Reserve Bank official

Overseas
Tuesday May 14 – US NFIB business optimism (April)
Tuesday May 14 – US Export & import prices (April)
Wednesday May 15 – US Retail sales (April)
Wednesday May 15 – US Industrial production (April)
Wednesday May 15 – US NAHB housing market index (May)
Wednesday May 15 – US Net capital flows (March)
Wednesday May 15 – China activity data (April)
Thursday May 16 – US Housing starts (April)
Thursday May 16 – US Philadelphia Federal Reserve index
Friday May 17 – US Leading index (April)

Food for thought:

“If we actually have a trade war, it would be bad for the whole world, and could be very bad, depending on the extent of the war.” – Warren Buffett

Stocks shorted:

ASIC releases data daily on the major short positions in the market. These are the stocks with the highest proportion of their ordinary shares that have been sold short, which could suggest investors are expecting the price to come down. The table shows how this has changed compared to the week before.

Chart of the week:

As highlighted by CommSec’s Ryan Felsman this week, Australian and New Zealand interest rates have aligned for the first time since February 2014 after the Reserve Bank of New Zealand announced a cut from 1.75% to a record low of 1.50%:

Source: RBNZ, RBA, CommSec

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Recent Switzer Reports:

Monday 06 May: Will this rally keep going?

Thursday 09 May: The digitisation mega trend

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